Passive vs. Active: Yet another Milestone Is Reached

by Mark Hebner and IFA Contributors - Monday, 16 June, 2014

According to this Bloomberg article, Vanguard just passed up Fidelity to become the number one provider of 401(k) assets, thus continuing the long-term trend of migration from active to passive that we have documented in several articles such as this one.

The current size of the defined contribution retirement market is a little under $6 trillion as of 12/31/2013, according to the Investment Company Institute. Fidelity and Vanguard each account for about 10% of that market with assets in excess of $600 billion. The majority of Vanguard’s 401(k) assets are indexed while Fidelity still primarily offers active funds. Of course, the bigger part of the story is the difference in growth rates. While Vanguard’s assets grew by 28% in 2013, Fidelity’s only grew by 17%. Much of the growth for both firms can be attributed to market appreciation, as the S&P 500 Index returned 32.4%, according to Morningstar.

According to a press release from BrightScope several years ago, the two most popular Fidelity active funds in 401(k)s were the $108 billion Fidelity Contrafund (FCNTX) and the $27 billion Fidelity Diversified International Fund (FDIVX).  As the charts below show, there has been no significant alpha from either of these funds.


In future articles, we plan to apply this same analysis to Fidelity’s other active funds. In fairness to Fidelity, they are also one of the largest providers of index funds. Their S&P 500 Index Fund (FUSEX) was also identified by BrightScope as one of the top ten funds along with Vanguard’s and SSgA’s S&P 500 Index funds. We at Index Fund Advisors see a special irony in this because Fidelity (under Edward Johnson) spearheaded the opposition to Jack Bogle’s launch of Vanguard’s flagship index fund in 1975. As it turns out, “Bogle’s folly” was anything but foolish.

In all of this, the good news for plan participants is lower costs which invariably lead to higher returns. At Index Fund Advisors, we will continue to closely monitor the on-going migration from active to passive, and we will notify our readers of any further milestones that are reached.